Dividends and Soaring unemployment increases odds US banks will cut dividends

At the moment, thanks to the US trillion dollar stimulus the banks are ok in their risk management ratios. That being said, the credit cards which are issued by the millions to generate extra profits, the longer the economy is a shutdown phase, the more at risk the banks are. The government has given money to pay the house payments and food, but maybe not enough for credit card payments. Analysts are beginning to question, will the banks have to go to drastic measures if the shutdown lasts longer?

In an article by David Henry of Reuters, according to Goldman Sachs banking analyst Richard Ramsden credit cards have an outsized impact on the banks who have given out over $2 trillion in loans to consumers.

When someone goes into unemployment, particularly for an expecting short time, the person typically does not cut back all the expenses, because of the expectation the same at home limits would only last a month or maximum 2 months. As consumers waited for the government to send money, they tapped into their credit card lines. It is entirely probable that card card losses may double under severe economic stress and the number is tied to unemployment rates. Commercial loans losses are also expected to triple.

The good news, under existing conditions, the big banks can still pay their dividends but must be worried about the political chatter. The European Central Bank told their lenders to skip dividends and share buy backs. The Treasury has made no such demand.

Linking to dividend paying stocks, companies that accept and need government support, also must know it comes with a political consideration. High profile actions from the government mean the government wants the appearance of sharing the risk.

There are more questions than answers, till the next time – to raising questions.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s